Blowing smoke at tax

TAMPA - Last spring, the cigar industry fretted that the federal government might tax so-called "little cigars" into oblivion.

Several months later, though, it appears that the makers of cigarette-shaped little cigars have found a way to escape the high taxes. The cigarmakers have added more weight to their cigars, reclassified them as large cigars and now are subject to a lower tax rate, said Norman Sharp, president of the Cigar Association of America.

In the spring, the cigar industry rallied against a higher federal tax rate implemented to benefit the State Children's Health Insurance Program. One Tampa cigar factory, Hav-A-Tampa, blamed SCHIP for a steep drop in sales, and the company ceased its Tampa operations in the summer. Hav-A-Tampa's parent, Altadis USA, moved the Tampa plant's operations to Puerto Rico.

Little cigars may not be as iconic as fat stogies, but hundreds of millions are produced every year. They look like cigarettes and come 20 to a pack. Popular brands include Cheyenne and Dutch Treats.

Under the new tax rates, little cigars and large cigars are taxed differently, apparently giving rise to some major changes in cigar production.

For example, little cigars had been taxed at about 4 cents per pack before the new rate took effect. That rose to about $1.01 per pack after April 1.

Large cigars previously had been taxed at about 5 cents per cigar. That rose to up to 40 cents per cigar after April, depending on price. (These federal tax rates do not include separate state taxes.)

In recent months, the cigar industry has seen a surge in the production of large cigars. The government classifies large cigars as weighing more than 3 pounds per 1,000 cigars. Little cigars weigh less than 3 pounds per 1,000.

Factories in the United States and Puerto Rico produced about 743 million large cigars in August, according to the U.S. Department of the Treasury. That's up 85 percent from August 2008, when they made 402 million large cigars.

Meanwhile, production of little cigars plummeted. What's going on?

Sharp, the cigar association president, said it appears that cigarmakers changed their production techniques to factor in the SCHIP tax. Cigarmakers began adding enough weight to little cigars for them to exceed the 3-pounds-per-1,000 threshold and be classified as large cigars.

Because of the complicated way cigars are taxed, Sharp said he didn't know how much makers were saving by morphing little cigars into large cigars.

"I certainly didn't anticipate the migration factor," Sharp said of the switch to producing more "large" cigars.